The Green Transition and Public Finances

Caterina Seghini and Stéphane Dées
Authors registered in the RePEc Author Service: Stephane Dees

Working papers from Banque de France

Abstract: As the world faces rising temperatures, extreme weather events and environmental disruption, the imperative to mitigate climate change has never been more pressing. Yet the pursuit of effective mitigation could threaten the sustainability of public debt due to the potentially huge fiscal costs of the associated policies. This paper uses a dynamic general equilibrium approach that takes into account the macroeconomic implications of the green transition and its consequences for public finances. It shows that when the government relies too heavily on expenditure-based measures, it threatens the sustainability of public debt, by increasing the probability of sovereign default, leading to higher interest rates on government bonds. This higher public default risk has potentially significant repercussions on investment financing conditions for the private sector, and increases the cost of the transition to a net-zero economy. On the other hand, carbon pricing policies make the transition more viable for public finances, at the expenses of similarly high economic costs, while remaining effective in reducing greenhouse gas emissions. The welfare-maximizing optimal policy mix yields a balanced approach, where the share of the mitigation effort undertaken by the public sector ranges from 25% to 40% between 2030 and 2050.

Keywords: Climate Change; Mitigation Policies; Environmental Taxes and Subsidies; Public Finances (search for similar items in EconPapers)
JEL-codes: D58 E63 H23 H63 Q54 (search for similar items in EconPapers)
Pages: 41 pages
Date: 2024
New Economics Papers: this item is included in nep-dge, nep-ene and nep-env
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Persistent link: https://EconPapers.repec.org/RePEc:bfr:banfra:949

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